Amsterdam Leasing Company agrees to lease machinery to Harrisburg

Corporation on January 1, 2019. The following information relates to the lease agreement. The term of the lease is 7 years with no renewal option, and the machinery has an estimated economic life of 9 years. The asset is not of a specialized nature. The machinery cost is $525,000 and the fair value of the asset on January 1, 2019 is $700,000. At the end of the lease term, the asset reverts to lessor and has a guaranteed residual value of $50,000 and Harrisburg estimates the expected residual value at the end of the lease term will be $50,000. Harrisburg amortizes all of its leased equipment on the straight-line basis. The lease agreement requires equal of $109,365, beginning on January 1, 2019. The lessor believes the collect-ability of the lease payments is probable. Amsterdam desires a rate of return on its investments. Harrisburg's incremental borrowing rate is 6%, and the lessor's incremental implicit rate is unknown.

Instructions:

-Using the lease classification tests, determine the nature of this lease for the lessee.

-Compute the value of the lease liability to the lessee.

-Create the journal entries for Harrisburg for 2019 and 2020 related to the lease arrangements.

-Suppose Harrisburg estimates the residual value at the end of the lease term to be $40,000, but still guarantees a residual of $50,000. Compute the value of the lease liability at lease commencement. NOTE: Round all numbers to the nearest dollar.